Post-G7 pullback for Japan's yen

At seven-week low against dollar; pound at 15-year high

By

WanfengZhou

NEW YORK (MarketWatch) -- The yen fell to a record low against the euro and a seven-week low against the dollar Monday, a pullback engendered by the Group of Seven leading industrial nations failing to address weakness in the Japanese currency, prompting investors to reestablish carry trades.

At the same time, the British pound rose to a 15-year high against the dollar after strong U.K. house prices and hotter-than-expected inflation data increased the chances of a further interest-rate increase by the Bank of England in May.

The G7's statement issued over the weekend "set the tone for foreign-exchange trading," said Matthew Strauss, senior currency strategist at RBC Capital Markets. "The absence of any references to the weakness of the yen or increased pressure for a more rapid [yuan] appreciation and euro-bullish comments by European officials encouraged traders to add to carry trades." Read more.

Carry trades refer to the practice of borrowing in low-yielding currencies, such as the yen, and reinvesting in higher-return currencies and assets. The yen was also lower against the pound, the Australian dollar and the New Zealand dollar.

Late in New York, the dollar was quoted at 119.70 yen, compared with 119.16 yen late Friday. It reached a high of 119.86 yen in intraday trading, the highest level seen since Feb. 27.

The euro fetched 162.13 yen, compared with 161.25 yen, after rising to a record at 162.40 yen.

The euro stood at $1.3542, compared with $1.3529. It reached a high of $1.3576 earlier in the session, the loftiest level since January 2005.

The British pound traded at $1.9899 vs. $1.986, after earlier touching $1.9938, the highest level since September 1992. The dollar changed hands at 1.2135 Swiss francs, compared with 1.2141 francs. See live currency rates.

The dollar fell slightly against European currencies, showing a limited reaction to U.S. data on retail sales and international capital flows. A weaker-than-expected reading on manufacturing activity in the New York area also had a limited impact on the currency market.

Reading between the G7 communiqué

The G7 statement repeated verbatim its language on exchange rates from the group's February statement. The communiqué stressed that "exchange rates should reflect economic fundamentals" and that "excess volatility and disorderly movements in exchange rates are undesirable for economic growth."

"We continue to monitor exchange markets closely, and cooperate as appropriate. In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur," the statement said. G7 text.

G7 financial leaders also said that Japan's recovery "is on track and expected to continue" and that "we remain confident that the implications of these developments will be recognized by market participants and will be incorporated in their assessments of risks."

The G7 statement "failed to add anything new to the currency comments that they made in Essen in February," said Steve Barrow, chief currency strategist at Bear Stearns, in a note. "It means any pre-G7 nerves about some sort of attack on the carry-traders should disappear and the trends that we saw before the meeting -- of both dollar and yen weakness -- should persist."

Barrow expects dollar-yen trading to continue to grind its way up to the 125 level over the next few months. Euro-dollar trading should see a rise to $1.40 this year, he said.

Stephen Jen, global head of currency research at Morgan Stanley, said the next move in the dollar is clear: "unambiguously down."

The dollar's "vulnerable to a broad-based sell-off" in the second quarter, with the yen likely to be the sole exception among the major currencies, he said.

"I can see this trend more clearly than any other trend in the past year," Jen told clients.

Separately, the Federal Reserve Bank of New York said manufacturing activity in the New York region inched higher to a reading of 3.8 in April from 1.9 in March, against expectations for a rebound to 7.6. See full story.

Meanwhile, the Treasury Department said capital flows to the U.S. totaled $94.5 billion in February, up from $79.6 billion in the previous month. Net foreign purchases of U.S. long-term securities including stocks and bonds, however, fell to $58.1 billion in February from $98.8 billion in January. See full story.

The dollar shrugged off news of a decline in U.S. home builders' confidence. The National Association of Home Builders said its Wells Fargo/NAHB housing market index fell from 36 in March to 33 in April, the lowest level since December. Builders were significantly more pessimistic about future sales than they were in March. See full story.

Sterling at 15-year high

Elsewhere, the pound rose after a report showed U.K. producer output prices rose 0.6% in March from February, putting the year-over-year at 2.7%. Economists had expected readings of 0.4% and 2.2%, respectively.

The core output price growth accelerated to 2.9% on a year-over-year basis. Input prices rose by 1.2% month on the month and by 0.7% year-on-year, also higher than expected.

A separate report showed U.K. house price growth accelerated 12.1% year-over-year in February, up from 10.9%.

"It's probably more a question of 'when' not 'if,' " Bear Stearns' Barrow said of sterling hitting the $2 mark.

"We have looked for it for a long time and we still hold on to our view that sterling will reach $2.10 in a year's time," he said in a note.

Boris Schlossberg, senior currency strategist at DailyFX.com, said if U.K. consumer price index and retail sales data show the same type of strength later on this week, "it will become increasingly likely that the [Bank of England] will hike rates in May."

"With the pound now within striking distance of the 2 level, any negative economic news out of the U.S. may push the pair through that barrier later on today on sheer momentum," he said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.